Tips for staying ahead in a quiet market
Summer trading can present a number of challenges for trading. For starters, ranges can be smaller due to the reduced volatility with many institutional traders away from their desks. Markets are more vulnerable to having patches of illiquidity with random moves taking out stops more readily on any lack of order flow. All of the above can result in some frustrating trading experiences, so here are some tips to help you keep a cool head during the hot summer months.
Be aware of ranges
If there is a strong range in play, then it is more likely to hold during summer trading. So, pay attention to tests of key levels and take a quick look at the news. Are there any key releases that are coming out?
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If there is not, then the chances of a well-established range holding are strong. It could be a great location to trade a quick bounce off a key level. Similarly, if a key level looks like breaking during the summer months, and there is little in the way of significant market news, then that break may well be a false break. So, be aware of these two phenomena; strong ranges holding and false breakouts of key levels.
Be aware of changing market dynamics
Automation has been impacting nearly every area of our lives and foreign exchange trading is no exception. Once institutions looked to 'the man' now more and more they look to 'the machine'.
Algorithmic trading has increased considerably over the last few years and this is resulting in a key change. The algorithmic trading model involves the 'algos' being switched on during the whole year; computers do not need a holiday. Their short-term, constant day to day profit profiles means that they are going to be left running during the summer months,
So, even though the large investors may have key staff on holiday, the age of automation means that the trading of assets in FX goes on.
Technical levels are still in play
Just because it is summer it does not mean that technical levels are forgotten. The key moving averages are still respected. Key moving averages like the 50 MA, the 100 MA and the 200 MA will still be respected during the summer.
Similarly, fib retracement levels and horizontal support and resistance levels can still be relied upon. Take a look at the daily EUR/USD chart below to see how the moving 50 daily moving averages is respected during the summer months. These levels can be used to limit and define risk.
Be aware of surprise events
Just because it is the summer it doesn't mean that there can't be some very large moves in the currency markets. One recent example is that of the Turkish Lira. It lost an astonishing 20% of its value in just one day of summer trading.
If you look at the chart below you can see the nearly parabolic weakening of the Turkish Lira against the US dollar. Moves like these are rare, but they are possible at any time. So, keep alert for any major market moving news. If you had been switched onto the story behind the moves seen here, you could have netted yourself a tidy profit.
Be willing to reduce intraday targets
You may want to consider taking slightly smaller profits during the summer months and particularly consider taking profits when price pushes into key support and resistance levels which are less likely to break. If you normally look for 60% of the average true range for your profit target, consider taking 50% of the average true range instead.
Be prepared to set wider intraday stops
At first this can seem counter intuitive, if ranges are narrower shouldn't you use smaller stops too? Not necessarily. To understand this point look at the market when it opens each week on a Sunday evening.
What do you notice? You will see a market that seems slow, yet it can have very quick and strong short term directional moves. Why is this and what is going in here? This is how an illiquid market moves. Now, if there is a lack of liquidity during normal market hours the same type of price action can occur. This can needlessly take out your stops, so consider reducing your position size and setting wider stops.
Be sensible and take a break
You will also want to factor in a break during the summer and make sure you don't trade when you are on holiday. It will firstly ruin your holiday and secondly it will present you with logistical problems if you lose internet connection or can't check your trade during a flight or a trip. So, ensure that you give yourself a summer break too. The markets will still be there when you return.
This post was submitted by brokerage, LegacyFX
